-- Posted Monday, 24 June 2013 | | Disqus

Banks face another global financial crisis worse than 2007-8 warns the normally conservative Swiss-based Bank of International Settlements as a $10 trillion central bank bond mountain leaves them perilously exposed to higher interest rates.

The Federal Reserve recently triggered a global tightening of interest rates with hints it may start to wind down its money printing as soon as this September.

Bondholders

The problem is that higher interest rates mean lower bond prices, and the banks are stuffed full of this supposedly safe debt. HSBC has 42 per cent of its balance sheet in US bonds, for example, and that’s arguably the safest of the large bank balance sheets.

When interest rates go up the banks therefore make losses on their huge bond portfolios. Global central banks have accumulated $10 trillion in bonds that will also face massive losses.

‘Someone must ultimately hold the interest rate risk,’ concludes the BIS. ‘As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care.’

The BIS has issued an urgent appeal for fiscal and monetary prudence but you can’t help reaching the conclusion that it is probably too late for action now.

‘Public debt in most advanced economies has reached unprecedented levels in peacetime,’ says the report. ‘Even worse, official debt statistics understate the true scale of fiscal problems. The belief that governments do not face a solvency constraint is a dangerous illusion. Bond investors can and do punish governments hard and fast.

‘Governments must redouble their efforts to ensure that their fiscal trajectories are sustainable. Growth will simply not be high enough on its own. Postponing the pain carries the risk of forcing consolidation under stress – which is the current situation in a number of countries in southern Europe.’

The BIS sees the global economy heading for a 1994-style bond market crash. However, the world has moved on since then and China is very much a part of the global economy, and its emerging debt crisis could be the biggest of all.

Shanghai surprise

A recent spike in short-term interest rates well above 30 per cent is a red light flashing in Shanghai. The overnight repurchase rate today is 6.5 per cent, more than double this year’s average. But what can the Chinese government really do now, having made its policy errors many years ago?

Where can you put your money if you cannot trust bonds or the global banking system? You end up back with precious metals as George Soros’ ‘ultimate financial bubble,’ and the only place for investors to hide when things go seriously wrong.

Old sages like Dr. Marc Faber are personally buying up precious metals while prices are temporarily depressed, knowing that the real crisis is around the corner. And you don’t have to believe him. The BIS report says it all very clearly. No wonder many bankers are themselves very nervous these days.

-- Posted Monday, 24 June 2013 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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